GREENHOUSE GAS REDUCTIONS THROUGH

PERFORMANCE CONTRACTING UNDER EPAS CLEAN

POWER PLAN

NOVEMBER 26, 2014

PREPAREDBY:

ii

TABLE OF CONTENTS Acronyms and Abbreviations iii Executive Summary ES-1 1. Performance Contracting

Overview 1 A. What Is Performance Contracting? 1 B. Rigorous Measurement and Verification

Is Integral to Performance Contracts 4 C. The Market for Performance Contracting 6 D. 111(d) Could Expand or Contract the

Quantity of Energy Efficiency Delivered by Performance Contracting Projects 8

E. State Performance Contracting Program Examples 9

2. Benefits of Including Performance Contracting in the Clean Power Plan 10

A. Performance Contracting Will Increase Energy Efficiency Delivered under the Clean Power Plan 10

B. Primary Benefits of Performance Contracting in 111(d) Programs 11

C. Additional Benefits of Performance Contracting in 111(d) Programs 21

3. EPA Actions Needed for Performance Contracting to Contribute to 111(d)Comments on EPAs Proposed Rule 29

A. Overview 29 B. Need For EPA Action 30 C. Multiple GHG Benefits of Performance

Contracting 30 D. Recommended M&V Approach to Enable

Performance Contracting to Contribute to State Compliance 31

E. Actions to Facilitate Use of Performance Contracts 33

F. Alternate Approach to the Best System of Emission Reduction 41

4. State Pathways for Performance

Contracting to Contribute to 111(d) 43

A. Synthesizing State 111(d) Plans with EPA Requirements 43

B. State Pathways to Establish a 111(d)

Compliant Performance Contracting Program 46

C. State Activities to Increase GHG Reductions Through Performance Contracting Project Activity 56

Appendices Appendix A Performance Contracting Contribution to State Compliance with 111(d) Goals Appendix B Matrix of Performance Contracting in States Appendix C Performance Contracting Project Summaries Appendix D Federal, State, and Local Performance Contracting Directives Appendix E Energy Performance Contracting in State Facilities, U.S. EPA, April 2008 Appendix F Guaranteed Energy Savings Performance Contracting State Agency Manual, Georgia Environmental Finance Authority, March 2014 Appendix G Sample M&V Reconciliation Report Appendix H Comparison of Methods for Estimating the NOx Emission Impacts of Energy Efficiency and Renewable Energy Projects: Shreveport, Louisiana Case Study, National Renewable Energy Laboratory, Revised July 2005 Appendix I FEMP Reporting Guidance for Federal Agency Annual Report on Energy Management, September 2013 Appendix J Resources for Crediting EE Emissions Reductions in Regulatory Compliance Programs

To download: http://www.ajw-inc.com/pc/

iii

Acronyms and Abbreviations ASHRAE American Society of Heating,

Refrigerating, and Air-Conditioning Engineers

BAU business as usual BSER Best System of Emission

Reduction C&I commercial and industrial CAA Clean Air Act CHP combined heat and power systems CO2 carbon dioxide CPP Clean Power Plan DOE U.S. Department of Energy DSM Demand-side Management ECM energy conservation measure EE energy efficiency EERS energy efficiency resource

standard EGU electric generation unit EM&V evaluation, measurement and

verification EPA Environmental Protection Agency EPC Energy Performance Contract ESC Guaranteed Energy Savings

Contract ESCOs private sector energy service

companies ESPC Energy Savings Performance

Contract EVO Efficiency Valuation Organization FCM forward capacity market FEMP Federal Energy Management

Program FPCC Federal Performance Contracting

Coalition GHG greenhouse gas GWh gigawatt hour HRI heat rate improvement IGA investment grade audit IPMVP International Performance

Measurement and Verification Protocol

ISO independent system operator LBNL Lawrence Berkeley National

Laboratory

M&V measurement and verification MUSH municipal, university, school, and

hospital buildings MWh megawatt hour NAAQS National Ambient Air Quality

Standards NAESB North American Energy Standards

Board NAESCO National Association of Energy

Service Companies NCSL National Conference of State

Legislatures NGCC natural gas combined cycle NIST National Institutes for Standards

and Technology NOPR Notice of Proposed Rulemaking ORNL Oak Ridge National Laboratory PACE Property Assessed Clean Energy PC performance-based contract or

performance contracting PJM Regional transmission

organization that coordinates the movement of wholesale electricity in all or part of 13 states and DC

PUC Public Utility Commission RE renewable energy REC Renewable Energy Credit RGGI Regional Greenhouse Gas

Initiative RPS renewable portfolio standard SEE State and local Energy Efficiency

Action Network SEO state energy office SIP state implementation plan TIP tribal implementation plan

ES-1

Executive Summary The Environmental Protection Agencys (EPA) proposed Clean Power Plan is commendable for its flexible design that will enable states and market actors to utilize the most cost-effective options to reduce power sector greenhouse gas (GHG) emissions, including efforts to increase demand-side energy efficiency (EE). Demand-side energy efficiency can be deployed in a variety of ways, through utility programs, state led programs and third-party energy efficiency projects delivered by private-sector energy service companies (ESCOs). This paper discusses the ways in which performance contracting (PC) projects can support compliance with the Clean Power Plan (CPP). PC projects are one of many highly-verifiable methods for implementing GHG-reducing demand-side EE and renewable energy projects.

Much of the private-sector EE work is done through performance-based contracts for energy savings, in which the ESCO reduces energy consumption of its customers by installing new energy efficient equipment at their facilities. This investment is paid off over time by the resulting savings in the customers utility bill. The performance of the newly installed energy conservation measures, and the resulting energy savings for its customer, is contractually guaranteed by the ESCO. The performance of the project is measured and verified (M&V) by experienced professionals, using internationally established protocols. This rigorous level of M&V is the foundation of the performance contracting guarantee. It appears that the energy efficiency elements of the Clean Power Plan were developed primarily with utility energy efficiency programs in mind, despite the fact that energy

efficiency investments through performance contracting approximate those made through utility programs. For example, performance contracting projects and utility programs saw around $12 billion of investment in 2012, with approximately half coming from performance contracting projects. Expressly allowing performance contracting to be a compliance option in the Clean Power Plan would significantly enhance state options for low-cost and rigorously verified GHG reductions. It would also bring into the effort those companies most focused on producing energy efficiency results. Including performance contracting projects as an allowable compliance option for state plans is straightforward and consistent with the Clean Power Plan. It builds upon past inclusion of performance contracting projects in approved state implementation plans for National Ambient Air Quality Standards. In addition, all 50 states have adopted performance contracting enabling legislation, which provides states with an excellent platform on which to build an effective compliance plan. However, additional guidance is needed for states to have confidence that EPA will recognize energy efficiency savings and distributed renewable

ES-2

energy generation delivered by performance contracting projects, and approve state plans that include them. The guidance should provide states with needed clarity on the following items:

1. Identify Approvable Pathway. Without limiting state flexibility, EPA can offer clarifying guidance to enable states to include performance contracting project-related emission reductions in their 111(d) compliance plans. [p. 33]

2. Recognize All Existing Programs. EPA should acknowledge as it did with energy efficiency resource standards, etc. that existing state performance contracting activities provide a potentially substantial contribution to 111(d) compliance. [p. 34]

3. Targeting Sources of Energy Savings. EPA should clarify how this requirement applies to performance contracting projects. We recommend that the states be required only to identify building types (e.g. state-owned, hospitals, universities etc.) targeted for performance contracting and a reasonable estimate of savings to be achieved from anticipated PC projects. [p. 34]

4. Aggregation of PC-Created Emission Reductions. EPA should describe approvable approaches for aggregation of PC project-related GHG reductions for use in 111(d) compliance. A national registry could serve this purpose, providing efficiency and the greatest degree of consistency in all aspects of inclusion of project-related GHG reductions in 111(d) compliance. Alternately, a state energy office (or another designated Agency) can collect (directly or via a third party) data from all PC projects in the state and determine the avoided emissions achieved. [p. 34]

5. Clarify Approvable Approach for Key Compliance Criteria. EPA can assist states by identifying approvable approaches for key compliance criteria that will facilitate inclusion of performance contracting project-related emission reductions. Key compliance criteria for which EPA should identify approvable approaches include M&V protocols, auditing requirements for state performance contracting projects, performance contracting program evaluation methods, and corrective measures. [p. 35]

6. Existing Facilities/Installations. Emissions reductions from performance contracting projects that are validated by an approved M&V approach and persist into the compliance period should be eligible to contribute to 111(d) compliance regardless of when the measure was installed. [p. 36]

7. Create Incentives for Immediate Action to Reduce Emissions. EPA should provide states with flexibility to take credit for actions taken after the Clean Power Plan was proposed and before the interim compliance period begins (2020) and count that credit toward achievement of the state's compliance obligation. This early-action provision would help ensure that the states have an incentive to reduce carbon emissions prior to 2020 and eliminate an unintentional incentive to delay EE projects until after 2020. [p. 37]

ES-3

8. Contributions to Future Avoided Emissions. Avoided electricity consumption should be allowed to count toward 111(d) compliance for performance contacting projects subjected to proper M&V. [p. 37]

9. Identify Remedies for the 111(d) State Energy Efficiency Penalty. EPA should address and resolve the energy efficiency penalty created when energy efficiency projects are implemented in electricity-importing states. As proposed, the rule would leave stranded and uncounted the emission reductions created by energy efficiency in an importing state because neither the importing state, nor the generating state, could claim credit for emissions reductions equal to 100% of those created by the energy efficiency program or project. [p. 37]

10. Encourage the Use of Tradable Credits. EPA should support the development and use of single-state and multi-state credit programs and other market-based systems. This will encourage the use of the least-cost compliance options, which, in many cases, will involve comprehensive energy retrofits. [p. 39]

1

1. Performance Contracting Overview

A. What Is Performance Contracting? EPA and other federal agencies are using a funding mechanismenergy savings performance contracts (ESPCs)to achieve environmentally preferable objectives at no additional cost. An ESPC is a form of third-party financing that funds energy-saving upgrades using the savings from future utility bills. This funding mechanism allows federal agencies to obtain energy-efficient technologies without having to commit capital funds. Contractors fund, install, operate, and maintain the energy-efficient upgrade projects. Based on the contractual agreement, the federal agency pays a portion of its annual energy cost savings to the contractor for the duration of the contract. U.S. Environmental Protection Agency1 Performance-based contracting for energy savings, also known as Energy Savings Performance Contracting (ESPC), Energy Performance Contracting (EPC), and/or Guaranteed Energy Savings Contracting (ESC), provides a one-stop procurement process that enables building owners to use savings from avoided energy consumption to pay for new energy-efficient equipment and services.2 Performance contracting (PC) is widely regarded as a turnkey mechanism to

complete energy-savings projects without reliance on capital funds. Under a PC, a facility owner will enter into a guaranteed energy savings contract with an ESCO. The ESCO will conduct a comprehensive energy audit of the buildings owners facility or facilities and will identify potential Energy Conservation Measures (ECMs) geared toward achieving maximum cost-effective energy savings. In consultation with the building owner, the ESCO will design and construct a project that saves energy and meets the energy and facility needs of the building owner. The project will bundle multiple ECMs, which individually have

varying paybacks and together achieve energy savings, and cash flow, by an agreed-upon and allowable contract term. The ESCO guarantees that the comprehensive energy savings improvements will generate sufficient energy cost savings to pay for the project over the term of the contract. After the PC, all cost savings accrue to the building owner (See Figure 1). The building owner benefits

1EPA website on Environmentally Preferable Purchasing, http://www.epa.gov/oppt/epp/pubs/case/espc.htm 2 For a more detailed overview of performance contracting, Appendix E contains EPAs report entitled, Energy Performance Contracting in State Facilities, EPA Clean Energy-Environment Technical Forum, April 2008.

2

from the reductions in energy consumption and the significant equipment upgrades made to the building(s), which improve functionality, performance, and overall energy management. For more than a quarter-century, this market-based mechanism has historically achieved significant but discreet gains in energy efficiency across the U.S. buildings sector. At the federal level, Congress authorized federal agencies use of PC in 1986. Today, federal agencies use a standardized process and contract overseen by the U.S. Department of Energys (DOE) Federal Energy Management Program (FEMP).3 According to FEMP, ESPCs have saved the federal government more than $8 billion by eliminating wasteful energy practices. While PC projects are designed to save energy, they also often incorporate RE such as solar, geothermal and biomass. Increasingly, PC projects include on-site distributed generation such as rooftop solar, ground mount solar, solar thermal and geothermal heat pumps. The nature of the energy savings achieved within the building or campus of buildings may present opportunities to reduce the upfront cost of renewable measures. Additionally, PC projects may include combined heat and power systems (CHP) in addition to building efficiency improvements. At the federal level, some PC contracts have been used exclusively for RE purposes to construct solar, landfill gas-to-energy, wind, and biomass. Distributed RE generation delivered through PC yields GHG benefits similar to EE savings since it reduces the customer electricity load that must otherwise be met through large electric generation units (EGUs) connected to the grid. States are well positioned to capitalize on emissions reductions achieved by PC projects since PC authorities or PC programs exist in every state in the nation (see Appendix B). PCs are an effective tool for reducing energy consumption by redirecting wasteful utility spending toward often long-overdue investments in new building systems and equipment. Since PCs create savings used to repay the ESCO for the purchase and installation of new equipment, they are used as much for their ability to address deferred maintenance and replace deteriorating equipment as they are for their ability to help an organization meet energy or environmental goals. Every PC project produces multiple measurable benefits for the building owners, spanning energy, environmental, and economic attributes. The co-benefits of including implementation of PC projects in EPAs CPP are discussed more fully in Section 2C.

3 DOE. 2014. DOE IDIQ ESPC Awarded Projects Summary. 5/7/2014. http://energy.gov.eere/femp/downloads/doe-idiq-espc-awarded-projects-summary

Nomenclature Performance-based contracting for energy savings (PC) is also commonly referred to as Energy Savings Performance Contracting (ESPC), Energy Performance Contracting (EPC), and/or Guaranteed Energy Savings Contracting (ESC). While different states or programs may use slightly different terminology, we use PC as an umbrella term describing the performance-based contracting for energy savings routinely undertaken by ESCOs.

Energy Conservation Measure (ECM)

Following are some examples of ECMs which may be bundled together within a PC project: Lighting

Improvements Building

Management Systems

HVAC Controls Efficient Boilers Efficient Chillers Electric Motors and

Drives Building Envelope

Improvements (windows & insulation)

Co-generation Systems

Renewable Energy Water Conservation

3

Energy Service Companies PC projects are developed and installed by ESCOs, and tend to be focused on achieving significant energy reductions (typically between 15-30% and in some cases 30-60%) through comprehensive energy retrofit projects usually at multi-building facilities. Growing rapidly in the past few decades, the U.S. ESCO sector is now a mature industry that provides EE savings via market based, third-party delivered and verified projects. ESCO industry leaders include Ameresco, Honeywell, Johnson Controls, NORESCO, Schneider Electric, Siemens, and Trane. ESCO engineers are experts in building system installation, operation and integration as well as methods and protocols for measuring and verifying project results. ESCOs provide world-class engineering solutions that take into consideration the potential for multiple energy systems to be optimized to maximize energy and water savings through comprehensive energy retrofits. What are Guaranteed Energy Savings? The energy savings guarantee is unique to performance-based contracting for energy savings. Federal and state PC laws require ESCOs to guarantee that improvements will generate sufficient energy cost savings to pay for the project over the term of the contract. The nature of the guarantee is commonly referred to as guaranteed energy savings. In practical terms, this requires the ESCO to annually validate all savings through strict M&V protocols. The guarantee is an integral aspect of PC as the ESCO bears the risk for the performance of the project. If a shortfall of the guaranteed energy savings were to occur, the ESCO bears financial responsibility. How Are Performance Contracting Projects Financed? There are various financing mechanisms utilized for implementing a PC. This includes, for example, low-interest financing options and various types of bond issuances. At the federal level, PCs utilize competitive third-party financing provided by well-established financiers. For municipalities and state governments, projects can be financed through tax-exempt bonds. For school projects, the most common form of financing are bonds and tax-exempt lease purchase agreements. Other financing mechanisms have been utilized for PCs in the public sector including Qualified Energy Conservation Bonds. Additionally, Property Assessed Clean Energy (PACE) financing can be utilized for commercial buildings. The cost savings associated with the PC are sufficient to cover the project investment and financing costs.

BEYOND GUARANTEED SAVINGS: ADDITIONAL COST SAVINGS ASSOCIATED WITH

ESPC PROJECTS

Oak Ridge National Laboratory The main conclusion of this report is that significant cost savings do accrue to the government. These savings come about because (1) the ESCO does not guarantee all of the savings it estimates; (2) the useful life of the equipment extends beyond the performance period of the ESPC; (3) National Institutes for Standards and Technology (NIST)/Energy Information Administration projections for energy price escalation have been very conservative with respect to actual price increases; and (4) the baseline case that forms the basis of the guaranteed savings calculation assumes that the baseline equipment would maintain the same efficiency and require the same level of maintenance for a period of time equal to the performance period of the ESPC. More realistic assumptions indicate that for a representative project, the federal government receives nearly twice the level of cost savings guaranteed by the ESCO. Source: Beyond Guaranteed Savings: Additional Cost Savings Associated with ESPC Projects, March, 2013. Oak Ridge National Laboratory, Prepared by John Shonder.

4

B. Rigorous Measurement and Verification Is Integral to Performance Contracts Overview The PC is named for its most essential feature, namely the contractual performance guarantee made by the ESCO that the project, once installed, will deliver the expected energy savings. The guaranteed energy savings delivered via this contractual arrangement necessitates a high degree of proof of savings. To accomplish this, rigorous M&V using established protocols (e.g. International Performance Measurement and Verification Protocol (IPMVP)) is conducted on all installed ECMs and retrofitted buildings in a project. ESCOs and their customers rely upon the use of well-established, and internationally approved, M&V protocols implemented by experienced professionals. Prior to the installation of any ECMs under a PC, the ESCO performs an investment grade audit (IGA), which includes extensive evaluations of how and when energy and water are used at the project site. The IGA provides measure-specific and time of day information needed for the detailed engineering and cost estimates upon which the ESCO bases the savings guarantee. Once the project ECMs are installed, their performance is measured and compared with the savings estimated by the IGA. Annual reconciliation reports, often reviewed and approved by third-party consultants on behalf of the customer, are used to compare actual and guaranteed savings (See Appendix G for a sample M&V reconciliation report). Savings shortfalls, if any, are usually remedied by having the ESCO repair a piece of malfunctioning equipment or having the ESCO supply additional retrofits. Once the guarantee period of the contract is complete, ongoing persistence of savings may be ensured by on-site inspections to determine that equipment remains in place, and is properly maintained and operated. The results of PC M&V are highly standardized and therefore highly replicable and can be easily and efficiently audited. The typical rigor of M&V performed under a PC is entirely consistent with the level of rigor EPA may want to require for EE programs under the CPP. It will provide performance data for each ECM, building, and project. This data can be aggregated by states and can provide standardized, replicable, and auditable information regarding avoided electricity consumption. The high degree of accuracy provided by PC M&V protocols can provide states with certainty regarding the CO2 reductions associated with PC projects.

EM&V vs. M&V

The terms evaluation, measurement and verification (EM&V) and measurement and verification (M&V) are often used interchangeably in the EE context, although there are important distinctions in the meaning of each. EM&V refers to analyses used to assess EE programs. The goals of EM&V include: determining whether overall objectives are being achieved; identifying any necessary program improvements; assessing program cost-effectiveness; estimating impacts and their persistence over time; and capturing energy and demand impacts in energy planning. M&V describes the activities used to determine project-specific savings resulting from installation of ECMs. An M&V plan may include a single option that addresses all the measures installed at a single facility or it may include several M&V options to address multiple measures installed at the facility.

5

Comparing Performance Contracting Energy Efficiency Projects to Utility- and State-Run Energy Efficiency Programs EE projects through the PC model are what private sector companies deliver to customers on a daily basis. The projects supported in this capacity are delivered to large single buildings or multi-building complexes for public and private sector end-users. Traditional utility EE programs, by contrast, focus on entire portfolios of individual measures (e.g. 4,000 air conditioner replacements in a utility service territory). These programs have long endured both regulatory approval and scrutiny, and often are used to meet various policy goals. Thus, EE programs have a history of being counted within policy, whereas comprehensive EE projects, delivered by private entities largely outside of any regulated process, have not been. Policies implementing the 111(d) rule should support both EE programs and EE projects as valuable tools that can be used for compliance. Comparing M&V: Performance Contracting and Utility- and State-Run Programs In general, the most common way to estimate the efficiency savings created by utility- and state-run EE programs is to conduct a statistical analysis comparing energy used among a representative sample of program participants and a control group of non-participants. This is seen as the most cost-effective approach for determining efficiency gains from large deployments of a single ECM used in multiple, dispersed buildings which is the focus of many EE programs. These programs do not have visibility into the performance of every specific installation of an energy conservation measure. By contrast, PC projects are optimized installations of multiple ECMs at a single site. To determine energy savings in a typical PC project, each ECM and building

system is measured and its performance is compared with the project baseline obtained during the IGA of the project site. This approach provides accurate data specific to the use of energy at the PC project site and offers increased rigor and certainty regarding efficiency savings compared with M&V based primarily on the statistical analysis of limited measurement samples. Performance Contracting is Complimentary to Utility-Delivered EE Programs While the development and implementation of PC

projects is not administered by utility-delivered EE programs, PC is a complementary mechanism to utility-delivered energy efficiency programs. PC

These energy efficiency investments by state and local governments using private and other nonratepayer financing operate outside of utility evaluation processes, but arguably have more stringent, sustained measurement and verification (M&V) of savings on a project-by-project basis, with financial penalties if those savings are not realized over the life of the project. Further, many ESPC programs are operated on a statewide basis by state energy offices or other state agencies and include standardized contracts and audits, nationally recognized M&V protocols, and contractor certification preapproval programs. The Potential Value of ESPC Energy Efficiency Savings Under EPAs Pending 111(d) Standard for Existing Power Plants, by David Terry, Executive Director of National Association of State Energy Officials.

6

projects may incorporate, for example, utility-provided rebates and incentives for some EE and RE measures, and can leverage and maximize such incentives in a comprehensive project that delivers significantly more savings in a single facility than the utility measure-based programs. Persistence of Savings and Auditing Performance Contracting Projects The standard data collection and savings calculation protocols of PC M&V activities have been replicated in thousands of projects and enables PC projects to be efficiently audited to ensure the quality of the data regarding savings. Recently, separate audits of federal ESPC projects have been conducted by both Lawrence Berkeley National Laboratory (LBNL) and Oak Ridge National Laboratory (ORNL) (See Figure 2). The LBNL study analyzed the savings delivered by PC projects during the life of the contract and found that 102% of the expected savings was realized compared with EE projects conducted by using appropriated funds, which delivered only 67% of anticipated savings.4 ORNL examined the persistence of savings of federal PC projects and found lifetime savings of PC projects were 141% of guaranteed savings.5 Among the reasons for this are both that ECMs operate long after the ESCO is fully paid and the contract expires, and that ESCOs tend to deliver more savings than they guarantee by contract. While the length of a typical performance contract ranges from 10-20 years, the useful life of many of the installed measures (e.g. chillers, and water fixtures) can be several decades.

C. The Market for Performance Contracting Approximately 85% of ESCO revenue comes from a combination of what is known as the MUSH market (63%), and the federal buildings market (21.4%).6 The MUSH market is comprised of buildings owned by municipalities, universities, schools, and hospitals, as well as state government and public agencies, which collectively own and occupy billions of square feet of building space. Commercial and industrial (C&I) buildings comprise 8.1% of the ESCO market (See Figure 3). PC projects are usually focused on large buildings or campuses of buildings since the scale of energy and water consumption at large

4 Coleman,Phillip; Earni, Shankar and Williams, Charles. Lawrence Berkeley National Laboratory. 2014. Could What That ESCO Sales Rep Said Really Be True? Savings Realization Rates in ESPC versus Bid-to-Spec Projects 2014. Page 5-74. http://www.aceee.org/files/proceedings/2014/data/papers/5-1278.pdf 5 Shonder, John. Oak Ridge National Laboratory. 2013 Beyond Guaranteed Savings: Additional Cost Savings Associated With ESPC Projects March, 2013. Page 11. http://btric.ornl.gov/publications/Publication%2041816.pdf 6 Stuart, Elizabeth; Larsen, Peter, H.; Goldman, Charles, A.; Lawrence Berkeley National Laboratory. Gilligan, Donald.; National Association of Energy Service Companies. Prepared for the United States Department of Energy.2013. Current Size and Remaining Market Potential of the U.S. Energy Service Company Industry. September, 2013. Page 17. http://emp.lbl.gov/sites/all/files/lbnl-6300e_0.pdf

7

facilities create opportunities for large savings that justify employing comprehensive analysis and integrated engineering solutions. ESCOs have historically had greater uptake in the MUSH market than the C&I market due to a variety of structural issues, such as:

Minimal complexity regarding tenancy and split incentives

Long-term occupancy Strong credit worthiness

However, if the CPP is successful in expanding the market demand for technologies and projects that reduce generation and emissions from EGUs, there may be significant increases in demand for PC in the C&I sector. For example, certain emerging financing mechanisms, such as PACE, show promise in potentially addressing some of these hurdles.7 PACE financing for commercial buildings has grown dramatically in recent years, from no projects in 2010 to over $250 million in PACE deals closed or in the pipeline nationwide. Effective 111(d)-related policies are likely to unlock more of this potential.

The National Association of Energy Service Companies (NAESCO) reports that since 1990, ESCOs have executed $45 billion in projects, producing $50 billion in guaranteed and verified energy savings.8 According to NAESCO, those projects have resulted in a reduction of 470 million tons of carbon dioxide (CO2) at little or no cost to the public. LBNL has estimated that ESCOs have delivered PC retrofit projects for a total of 4.9 billion square feet of space in the MUSH, federal, C&I and public housing market segments from 2003-2012.9 LBNL estimates an additional 17 billion square feet is immediately available in ESCO-addressable buildings, which represents the near-term untapped market potential for PC. These estimates were developed prior to EPA proposing its CPP. LBNL projects that annual aggregate ESCO industry revenue will be approximately $7.5 billion by 2014 and projects that ESCO industry annual revenues will range between $10.6 and $15.3 billion by 2020.10

7 In Connecticut, for example, the C-PACE program allows property owners to access financing to undertake qualifying EE and clean energy improvements on their buildings and repay the investment through an additional charge ("assessment") on their property tax bill. Capital provided under a C-PACE program is secured by a lien on the owner's property tax bill and paid back over time. 8 NAESCO. 2013-2014. What is an ESCO? http://www.naesco.org/what-is-an-esco 9 Stuart, et al., p.33. 10 Ibid. p. 13-15.

According to NAESCO, those projects have resulted in a reduction of 470 million tons of carbon dioxide (CO2) at little or no cost to the public.

8

D. Section 111(d) Could Expand or Contract the Quantity of Energy Efficiency Delivered by Performance Contracting Projects The CPP is likely to have a significant influence on the future of the EE market. On the one hand, implementation of the CPP could encourage the market to increasingly seek to implement EE projects with rigorous M&V, and, therefore, choose to both install more ECMs, and utilize ESCOs as highly trained, third-party project implementation and verification experts. Additional clarity and recognition of PC programs from EPA stipulating how states can use PC projects for CPP compliance would allow states to factor these savings into compliance plans. This could lead to a significant expansion of EE delivered through PC projects and overall EE projects in those states. Comprehensive energy retrofits of large facilities require significant at-risk investment in project development work over 12-30 months. The complex engineering challenges associated with these projects are generally beyond the scope of utility- and state-run EE programs. On the other hand, if states are not clear on the steps needed to include GHG emission reductions from PC projects into their compliance plans and reporting under the CPP, it should be expected that these projects are more likely to be excluded from state planning activities. The CPP, even as nothing more than a proposed rule, is already driving significant activity at the state and local level to re-examine energy plans, policies and incentives. It stands to reason that attention will be most likely focused on those activities that include the benefit increasing a states ability to comply with the CPP. If EPA does not help states understand how GHG emission reductions driven by PC projects can be counted toward CPP compliance, they will tend to focus on other compliance activities and neglect PC opportunities. This could inhibit demand for PC projects in many states. Absent an active ESCO market, large quantities of EE opportunity will remain beyond reach and untouched.

9

E. State Performance Contracting Program Examples

States can authorize ESPCs for state agencies, counties, municipalities, school districts, state colleges and universities, and public agencies. As state energy codes typically focus on new construction or significant renovations, ESPCs can help fill the gap by allowing owners of existing buildings to reap the economic and comfort benefits of efficiency. Some states have taken steps to ensure the success of performance contracting by identifying and prescreening eligible ESCOs, establishing offices or programs to monitor ESPCs, connecting ESCOs with building owners and offering outreach, education and support. ESCO-driven investments in 10 states resulted in more than $3.4 billion of investments and reduced carbon emission by 488,000 tons. Below are examples of state initiatives that work to ensure successful performance contracting programs.

The Colorado Energy Office has supported more than 146 completed projects and 26 active projects, for a total of $294 million in construction as of late 2012. The office provides technical assistance to public agencies, monitors and establishes standards for ESCOs, maintains contract documents, and provides education and outreach.

In 2013 Hawaiis performance contracting program drove more than $171 million in energy efficiency investments, the most of any state, according to the Energy Services Coalition. The performance contracting program, housed in the State Energy Office, offers technical assistance and maintains a list of pre-qualified ESCOs and educational documents.

Massachusetts Leading by Example and Green Communities programs in the Executive Office of

Energy and Environmental Affairs, Department of Energy Resources helps state and local government realize savings through ESPCs. The Division of Capital Asset Management and the Department of Housing and Community Development also oversee ESPC projects. The states Energy Performance Contracting Program lists current and completed projects.

Utahs efforts have resulted in more than $165 million of investments in ESPC projects through the

leadership of the Division of Facilities Construction and Management. The program is now directing its focus on large state university and college campuses. The states comprehensive program was initiated by legislation directing the state to undertake "aggressive programs to reduce energy use in state facilities in order to reduce operating costs of government and to set an example for the public.

The Washington state Department of Enterprise Services is responsible for overseeing ESPCs. As of

2012, the state ESPC program has been involved in more than $300 million of energy construction projects since its 1986 inception, resulting in a $15 million a year reduction in utility costs for public facilities. In addition to state agencies, counties, municipalities, school districts, state colleges and universities, and public agencies, the Department of Enterprise Services specifically advertises technical assistance for port districts, libraries, hospitals and health districts.

SOURCE: National Conference of State Legislatures (NCSL) webpage on State Energy Savings Performance Contracting, dated November 15, 2013. http://www.ncsl.org/research/energy/state-energy-savings-performance-contracting.aspx.

10

2. Benefits of Including Performance Contracting in the Clean Power Plan Including PC projects in the CPP is straightforward and consistent with the requirements of Clean Air Act (CAA) section 111(d). EPA should be commended for the open and flexible approach it has proposed, and should take action to ensure that the low-costs benefits of PC projects are incorporated in state compliance plans. EE savings associated with PC projects can provide benefits under any approach adopted by states, significantly reduce emissions of GHGs and criteria pollutants, and provide states with low-cost compliance options that can contribute in a meaningful way to compliance with 111(d) goals.

A. Performance Contracting Will Increase Energy Efficiency Delivered Under the Clean Power Plan Ratepayer-funded electric EE programs approved and overseen by the states and operated by utilities invest more than $6 billion annually and typically have energy savings verified through sampling and modeling protocols unique to each state. These traditional ratepayer programs were referenced by EPA as

an option for providing EE to meet the EPAs proposed CPP under Section 111(d) of the CAA. PC projects contribute a nearly equal amount of investment as ratepayer-funded programs (See Figure 4). The volume of PC projects is large because PC delivers comprehensive EE projects in times of tight budgets. EPA should consider ways to encourage states to include in their CPP compliance plans those EE savings created and verified by PC projects. Several actions suggested below would increase the likelihood that states would be willing and able to utilize PC projects as part of their CPP compliance. By supporting the inclusion of EE delivered by PC to be used to satisfy state compliance requirements under the CPP, EPA could significantly accelerate

growth in the demand for PC projects and thereby increase the deployment of more efficient building systems. In turn, that would result in more rapid reductions of GHG emissions than would have otherwise occurred without reliance upon PC in state plans. Greater reliance on the GHG savings

11

delivered through EE projects would delay, or entirely displace, the need for some of the most expensive 111(d) compliance actions by utility generators and reduce the overall costs of implementation. As an example, PC projects could enable a utility to avoid expensive upgrades on a coal-fired power plant that is slated for closure but still meet its GHG reduction targets (See State 111(d) Compliance Flexibility in Section 2C and Appendix A). By taking the actions recommended in this paper, EPA would facilitate an increase in the volume of GHG emission reductions delivered by PC projects where the ESCO market is well-established. States with robust PC programs, would see greater benefits as the savings from PC projects grows. States that have not fully utilized the potential of their PC programs would likewise see greater energy savings and GHG reductions as more PC projects are implemented in their states. In addition to expanding the number of states aggressively utilizing PC, the CPP could create market demand outside of the traditional MUSH building market that has pioneered PC project use. The portion of the built environment owned and operated by the private sector dwarfs the public sector. With support from EPA and state implementers of section 111(d), private sector building owners could see increased value in implementing comprehensive energy retrofits that save money, energy, water, and reduce GHG emissions.

B. Primary Benefits of Performance Contracting in 111(d) Programs Performance Contracting Projects Are Consistent with the CPP Goals EPAs proposed CPP creates a flexible design that will enable states and market actors to utilize the most cost-effective options to reduce GHG emissions from the nations power generation sector. PC projects complement and support the objectives of the CPP by reducing electricity demand. Energy savings guaranteed and delivered through PC projects already help states achieve energy savings, reduce the environmental impacts (including CO2 emissions) of meeting energy needs, save money for taxpayers and energy consumers, and provide a significant resource for meeting power system capacity requirements. The standard protocols already in use by PC projects to accurately measure and verify savings also can be used to measure CO2 savings. The high level of rigor associated with the M&V of savings under PC projects is a chief reason why PC is a desirable and complementary tool to achieve the EE savings

ESPCs are a critical tool that will enable the Federal government agencies to meet statutorily-mandated energy reduction goals at no upfront cost to taxpayers. If utilized to their full potential, ESPCs can create tens of thousands of full-time jobs. Testimony of William L. Kovacs, Senior Vice President, Environment, Technology and Regulatory Affairs, U.S. Chamber of Commerce before the Committee on Science, Space and Technology Subcommittee on Investigations and Oversight, U.S. House of Representatives, April 13, 2011.

12

sought by the CPP. States will benefit from PC in either a rate-based approach or a mass-based approach. While the EE elements of the CPP appear to have been developed primarily with utility EE programs in mind, the CPP can rely on EE delivered through PC projects to achieve the same or greater EE results. PC is legally authorized in every state in the nation (see Appendix B) and more states each year are recognizing that aggressive PC programs are an effective and sustainable way to make buildings more efficient. Thus, the CPP has the potential to capitalize on a foundation already in place in states to deliver low-cost, rigorous project-based EE. Universal Applicability PC projects can be used in every state, and by nearly any EGU, to deliver EE savings and GHG reductions with rigorous verification. EE savings and GHG reductions achieved by PC projects can be universally incorporated into all four of the likely state plan pathways identified by the EPA: Rate-Based Emission Limits: The avoided generation and emissions

resulting from PC projects could be used to adjust the CO2 emission rate of affected EGUs. The adjustments would be based upon protocols either pre-approved by EPA or reviewed by the Agency as part of its consideration of a state's proposed plan. The rigorous M&V will provide enforcement agencies with high quality data to assess generation and emissions outcomes.

Mass-Based Emission Limits: PC projects fit EPA's concept of complementary measures that can help states meet a mass emission limit at lower cost. States will value the relative certainty associated with reductions that are backed-up by a series of contractual obligations.

State-Driven Portfolio Approach: PC projects provide large reductions in emissions at little or no net cost after factoring in their energy savings. They are therefore likely to become key components of states plans. The PC measures could be incentivized (or required) and tracked by a designated state agency and/or a state could utilize project data provided to a state, regional or national project registry.

Utility-Driven Portfolio Approach: Since PC projects are extremely cost-effective compared to most other GHG control measures, public utility commissions could incentivize or require their use as part of a utility control program (e.g. improving energy efficiency in power plants). Alternatively, a state could decide to undertake a PC program separately and use the results to reduce the compliance burden on the state's electric utilities.

Assessing the permanence of the emissions reduction is another key issue. A high level of project certainty and permanence is required for SIP planning purposes. In the Shreveport project, there is a high level of certainty that permanent emissions benefits will result from this project due to the longevity and nature of the Performance Contract between [the ESCO] and the City of Shreveport. The 20-year Performance Contract provides details of the expense, duration, and magnitude of the lighting system upgrades, mechanical system upgrades, control system upgrades, water conservation upgrades, and other miscellaneous upgrades, and guarantees the energy performance of the overall system. Source: Comparison of Methods for Estimating the NOx Emission Impacts of Energy Efficiency and Renewable Energy Projects: Shreveport, Louisiana Case Study, National Renewable Energy Laboratory, Technical Report NREL/TP-710-37721 Revised July 2005.

13

Greenhouse Gas Benefits Resulting from Performance Contracting The GHG benefits of EE savings from PC projects are identical to the GHG benefits of utility EE programs as articulated by EPA in the CPP. Namely, those benefits are reducing emissions from affected EGUs in the amount that results from the use of demand-side EE that reduces that amount of generation required.11 Investment in PC has delivered low-cost, rigorously measured and verified energy savings leading to large scale GHG reductions from the power sector (in addition to GHG savings from outside the power sector). Given the growth in the ESCO industry projected by LBNL, PC projects can achieve substantial potential reductions in GHG emissions from the utility sector. The carbon intensity of the power supply has undergone significant changes as older coal plants have been retired, natural gas, wind and solar have been deployed at much greater rates, and demand-side EE has grown. The GHG profile of the power sector is further complicated because the carbon intensity of electricity is affected by time-of-day and location, although GHG reductions associated with curtailed use of EGUs must be calculated in a way that is not overly burdensome and does not create barriers to GHG-reducing offerings. In this paper, we use a basic approach to estimate the amount of GHG reductions that can be achieved through PC. Based on data described below (See Section on Potential PC Contribution to 111(d) Compliance) the cumulative energy savings of the PC market in 2030 will range between 104 and 190 million megawatt hours of electricity avoided. Using one-half ton of carbon dioxide per megawatt hour of electricity as a proxy metric for carbon intensity, PC projects may avoid GHG emissions from the electricity sector in the range of 52 million to 95 million tons in a single compliance year (2030). Additional GHG benefits follow the reduced onsite fossil fuel consumption and reduced water consumption often associated with PC projects (but will not be eligible for credit under 111(d)). In light of this potential, EPA should be interested in policies that unleash the full potential of this market. Rigor of Measurement & Verification In its Notice of Proposed Rulemaking (NOPR) for the CPP, EPA raised appropriate questions regarding the rigor of measuring the GHG impact of EE projects. The well-established M&V protocols followed in PC projects to substantiate the contractual savings guarantee make PC projects ideally suited to produce the necessary M&V rigor to demonstrate CO2 savings that can

11 EPA, Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, Proposed Rule, June 18, 2014, p.34836.

The Federal government has made great progress in achieving savings through performance contracting ESPCs offer a great deal of flexibility to Federal agencies by allowing them to perform significant energy and water management upgrades to their facilities without significant upfront costs when appropriated funds for capital investments are not available. By engaging private sector financing and ESCO expertise, ESPCs provide multiple benefits to both the Federal government and the American public. By making the use of ESPCs, agencies will be able to incorporate more energy and water conservation measures to maximize savings and meet their statutory and Administration energy and sustainability goals. Testimony of Dr. Kathleen Hogan, Deputy Assistant Secretary for Energy Efficiency, Office of Energy Efficiency and Renewable Energy, U.S. Department of Energy before the Committee on Science, Space and Technology Subcommittee on Oversight and Subcommittee on Energy, U.S. House of Representatives, June 27, 2013.

14

contribute to state compliance with 111(d) emission guidelines. In fact, in its Technical Support Document on State Plans Consideration, EPA recognizes the M&V protocols most often used in PC projects, including the International Performance Measurement and Verification Protocol (IPMVP)12 and the FEMP M&V Guidelines.13 The elements described in EPAs Roadmap for Incorporating Energy Efficiency/Renewable Energy Policies and Programs into State and Tribal Implementation Plans14 provide a precedent for what EPA would consider an acceptable level of M&V under the CAA. A small number of EE measures have been incorporated into approved state implementation plans (SIPs), confirming the ability of EE to facilitate compliance with the CAA. If included in state CPP projections, calculating both the CO2 and the criteria pollutant emission reductions could easily become standard practice for PC project M&V activities. Given that PC projects incorporate M&V protocols that would meet EPAs requirements for inclusion in SIPs, they should also be acceptable as an element of an approvable state plan under 111(d). State plans can easily utilize existing state PC programmatic frameworks to facilitate compliance and ensure that all GHG savings associated with PC projects are quantifiable, non-duplicative, permanent, verifiable, and enforceable. Performance Contracting is a Low Cost Greenhouse Gas Mitigation Tool By redirecting future energy spending into more productive uses, including the replacement of outdated equipment, PCs achieve environmentally preferable objectives at no additional cost.15 The costs of making EE improvements under PC are more than paid for by future energy savings contractually guaranteed by ESCOs. Over the life of a project, the cost is that of any incentive, rebate, or other taxpayer or ratepayer assistance that is utilized within the cash flow of the project. Most often, no such incentives are used in PC projects. Some states may bear some limited programmatic costs if the CPP identifies PC projects as an eligible compliance mechanism in a manner consistent with the recommendations in Section 3 of this paper.

12 Efficiency Valuation Organization (EVO), International Performance Measurement and Verification Protocol (2012), available at: http://www.evo-world.org/. 13 FEMP, M&V Guidelines: Measurement and Verification for Federal Energy Projects, Version 3.0 (April 2008), available at: https://www1.eere.energy.gov/femp/pdfs/mv_guidelines.pdf. 14 Roadmap for Incorporating Energy Efficiency/Renewable Energy Policies and Programs into State and Tribal Implementation Plans available at http://www.epa.gov/airquality/eere/manual.html.15 EPA website on Environmentally Preferable Purchasing, http://www.epa.gov/oppt/epp/pubs/case/espc.htm.

Performance contracts drive economic development, utilize private sector innovation, and increase efficiency at minimum costs to the taxpayer, while also providing long-term savings in energy costs. In coming months, the Administration will take a number of actions to strengthen efforts to promote energy efficiency, including through performance contracting. The Presidents Climate Action Plan, June 2013, p.11.

15

State uptake costs would likely range from de minimis to low if a state air agency were to work with its states energy office and/or another applicable agency currently responsible for overseeing the states performance contracting program. An energy office, for example, could assist the air agency in determining a reasonable estimate of the potential PC that could contribute to a states compliance plan. Administrative costs could further be reduced before and during the compliance period by utilizing PC project information provided by a national project registry. For example, in 2017 FEMP will track federal PC projects in a national PC project registry. This data could be made available for states to utilize in determining the amount of federal PC projects (occurring within their respective state) a state could incorporate into their compliance plans. In the proposed rule, EPA identifies the cost of heat rate improvements at coal fired power plants to be $6-12 per ton of CO2 reduced.16 The cost of redispatching coal-fired generation to natural gas combined cycle facilities is $21-40 per ton of CO2 reduced.17 Under building block 3, the cost of deploying new renewable generation is estimated to cost $10-40 per ton of CO2 reduced.18 EPA estimates that the cost of preserving at-risk nuclear capacity will cost $12-17 per ton of CO2 reduced.19 In calculating Best System of Emission Reduction (BSER) for EE, EPA relied exclusively on EE programs administered by utilities and states, which were estimated to cost $16-24 per ton of CO2 avoided.20 Utilization of all four building blocks can achieve greater overall CO2 emission reductions from affected electric generating units than building blocks 1 and 2 in isolation. Given the low cost of PC projects, significant utilization of EE through PC will create the most robust opportunity for low-cost compliance with the section 111(d) rule. The 111(d) NOPR provides insight regarding how to consider the cost of GHG reductions achieved through PC. In discussing the cost of heat rate improvements at coal-fired power plants, EPA acknowledges that the best practices pay for themselves at least in part through reductions in fuel costs. This is consistent with the economics of PC in which EE retrofits pay for themselves since upfront investment is repaid with future energy savings achieved over the life of the project (See Section 1A for further discussion). In addition, the proposed rule assumes that the cost of reducing GHGs from at-risk nuclear capacity is the cost of incentives that will be needed to make these facilities economical. Similarly the limited public investment of ratepayer or taxpayer dollars used to establish a state PC program or used sometimes to

16 EPA, Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, Proposed Rule, June 18, 2014, p.34856. 17 Ibid. p.34857. 18 Ibid. p. 34858. 19 Ibid. p. 34871. 20 Ibid. p. 34858.

16

achieve more comprehensive energy savings or to make marginal projects more economical makes the use of PC very low. Potential PC Contribution to 111(d) Compliance Given the large scale of potential electricity savings generated through PC, their utilization can be an important compliance tool for states to meet their 111(d) goals. As Figure 4 illustrates, utility EE programs and PC projects have very little overlap, and building block four of the 111(d) proposed rule was exclusively predicated on EE programs administered by utilities and states.21 Therefore, electricity savings generated by PC projects create a significant opportunity for states to comply with their emission guidelines from a source that is largely distinct from the four building blocks used to set the 111(d) goals. As a result, EE savings generated by PC can be seen as separate from the EE savings that EPA anticipates will be achieved through utility and state administered EE programs. As a result, EE savings from PC projects can be an immediate source of EE savings in states that do not have energy efficiency resource standards (EERS) or advanced utility EE programs. While state policies will ultimately guide how successful these programs can be, states should view PC as a cost-effective compliance tool that can increase compliance flexibility. In order to better understand the extent to which the EE savings generated through PC can help states comply with the 111(d) goals, we have examined the PC market potential through 2030, estimated how much electricity those investments may avoid, and projected how PC project EE savings translate to numerical compliance with rate-based 111(d) final goals. As noted earlier, LBNL has conducted comprehensive analyses of the ESCO industry, focusing on the current size of the market and its future potential. LBNL noted that the size of the market in 2013, which is indicative of investment in PCs, was more than $6 billion. LBNL further estimated a high end and low end scenario for the potential size of the ESCO market through 2020. Full implementation of 111(d) regulations could support market developments that could enable the ESCO industry to reach or exceed the high case estimate. LBNL calculated the low case growth rate of the ESCO industry with 8.3% compounded annual growth, based on actual industry growth from 2008-2011. Using this approach, LBNL estimates that the PC market will be $10.6 billion in 2020. The high case growth rate is calculated at 12.6% compounded annual growth, based on ESCOs projected growth from 2012-2014. LBNL estimates that the high case scenarios for the ESCO market in 2020 is $15.3 billion.

21 Ibid. p. 34872. These [demand-side energy efficiency] savings levels are realized exclusively through the adoption and implementation of energy efficiency programs and that the energy savings data underpinning these analyses are derived from energy efficiency reports required by state public utility commissions and other entities with a similar oversight role.

Carbon reduction strategies initiated by cities and counties that utilize PC for demand-side EE can be easily incorporated into state 111(d) plans, so long as the PC projects adhere to the EPAs recommended M&V protocols. These municipal-led programs and projects could report their applicable PC-delivered annual carbon reductions to their respective state energy office. These projects would augment state demand-side EE efforts and further incorporate the use of utility-delivered energy efficiency incentives and rebate programs across large building owners in the state.

17

LBNLs analysis is a snapshot of potential size of the PC market at the beginning of the 111(d) interim compliance period (2020). In order to understand how the PC market may contribute to state compliance with 111(d) goals, existing research is used to extrapolate the size of the industry through 2030. LBNL has not published work estimating the market size in the 2020-2030 time period. In the absence of such data, LBNLs high and low case growth rates through 2020 is assumed to persist through

2030. As LBNL indicated in their study, there is tremendous remaining market potential, much of which will not be addressed prior to 202022. Assuming that PC is included as a compliance option in the final 111(d) rules, the ESCO industry may grow at least at the same rate in 2020-2030 as currently projected for 2014-2020. Therefore, for the purposes of determining how PC will potentially contribute to 111(d) compliance, LBNLs low-case scenario growth rate of 8.3% is continued through 2030, and their high-case scenario growth rate of 12.6% is continued through 2030. Under these scenarios, ESCO industry market size may range between $23.6 and $50.5 billion in 2030 (See Figure 5). While 111(d) focuses on the GHG reductions associated with avoided fossil fuel-fired electric generation, PCs typically provide multiple forms of energy

savings. Many PCs reduce electricity, onsite fossil fuel, and water consumption all under one project and contract. These GHG reductions could make a meaningful contribution to state compliance under either a rate-based or mass-based approach. Using industry data established through a sampling of projects, we calculate how much electricity is typically avoided per year in relation to PC investment and apply it to future market projections. For purposes of this

22 The savings potential may be greater since LBNL anticipates neither future advances in technology nor additional PCs at sites that have undertaken prior PC projects.

18

illustration, we utilize an average project savings lifetime of eleven years, with savings evenly distributed over those eleven years. This is consistent with the comprehensive energy retrofits using rigorous M&V associated with typical PC projects and is conservative since savings historically persist well beyond the contract term. Using this methodology, we estimate that cumulative electricity savings achieved by PC projects in 2030 will range between 104 million and 190 million megawatt hours (See Figure 6). This number is illustrative of the relative scale of electricity savings associated with PC and is not intended to be an estimate of future performance. Next, we disaggregate national electricity savings estimates by state, which has not been done by any of the major studies of the ESCO industry. We considered three different options to apportion national level investment (and therefore electricity savings) to states: according to past ESCO investments, on a per capita basis, and proportionate to energy consumption. Every state in the nation can take advantage of PC if it has the right policies and programs in place. All states have PC-enabling legislation in place for state and local government buildings, but few states are exploiting the potential for PC as fully as possible. One could argue that the states with historically aggressive PC programs will be leaders in the future. On the other hand, states that have been less aggressive may see the 111(d) compliance benefits of pursuing PC with more vigor. Since historical industry data is retrospective, and no studies have estimated which states will be most active in the future, we assume that each state will reduce electricity through PC in proportion to the amount of energy that state consumes (See Figure 7).23 For purposes of this analysis, we inserted each states cumulative electricity savings attributable to PC in EPAs goal computation spreadsheet,24 which was modified to calculate the pounds of carbon dioxide per megawatt hour reduction in each states carbon intensity rate as a result of PC. We calculated this in the same manner that EPA calculated the goals for EE programs under building block four. The cumulative avoided electric consumption is multiplied by 1.0751 to estimate the amount of generation that was avoided by reducing consumption (taking into account the estimated 7.51% transmission and distribution loss prior to consumption). In addition, only the percentage of

23 Figure 7 is calculated using EPAs State Goal Data Computation Spreadsheet. The figure reflects each states electricity sales as a percentage of the total national electricity sales. 24 EPA Goal Computation Technical Support Document, State Goal Data Computation Spreadsheet. For the purposes of determining the contribution of PC projects to states compliance obligations, the goal computation spreadsheet was modified to determine how much the state goal would have been reduced if the avoided electricity consumption attributable to PC projects were added to the denominator of a states rate-based carbon intensity equation in the same manner as avoided electricity consumption attributable to EE programs. The reduction in a states carbon intensity attributable to PC projects is the difference between the final goal and what the final goal would have been if PC projects were BSER. However, we are not recommending that PC projects be included as BSER. This illustrates the potential contribution of PC projects to state compliance without prejudging the exact method by which a state would determine compliance with final goals.

Figure 7: State % of U.S. Electricity Consumption (U.S. EIA)

19

EE savings equal to the states percentage of consumption generated in that state (up to 100%) was credited.25

The potential for PC to contribute to state compliance with 111(d) goals is confirmed by the results of this calculation. The average reduction in a states carbon intensity is 27 lbs CO2/MWh in the low-case scenario and 48 lbs CO2/MWh in the high-case scenario. The potential for PC to contribute to a states total compliance obligation26 averages 7.1% nationally in the low-case scenario and 12.5% nationally in the high-case scenario. We further analyzed the data to determine the impact of PC in states with 1) higher overall reduction obligations, 2) lower overall compliance reduction obligations, and 3) relatively low numeric final goals. The data was aggregated across three states in order to ensure a representative sample and to reduce confusion about the purpose of this data. We do not intend to predict future PC investment or electricity savings in any particular state. Rather,

we illustrate how PC may contribute to state 111(d) compliance and in what proportion. The data is summarized in Table 1 and suggests that PC at the illustrated levels will achieve larger impacts in states with lower overall reduction obligations. In three states with an average overall 111(d) reduction of 49.2%, PC could contribute in a range of 3.1-5.5%. In three states with an average overall 111(d) reduction of 18.0%, PC could account for reducing that compliance obligation between 14.3-25.0%. The impact of PC in the three states with final goals averaging 590, correlated more with the average overall reduction of 29.7% rather than the numeric value of the final goal. In those three states, PC could contribute in a range of 7.6-13.5%. For the 49 states with 111(d) goals, Figure 8 illustrates the range of contribution that PC projects may make to compliance in 2030. While the average contribution is 27 lbs/MWh in the low-case scenario and 48 lbs/MWh in the high-case scenario, there is significant variability among states. However, the points on this graph are not static. The contribution of PC projects to state compliance will increase with implementation of more aggressive policies. Figure 8 supports the conclusion that robust PC programs

25 See Section 3A for comments on how EE savings should be handled between electricity importing and exporting states. 26 The following is an example of how to calculate contribution to a states total compliance obligation. If a state is required to reduce its carbon intensity from 1,000 lbs/MWh in the 2012 baseline to 500 lbs/MWh by 2030, a 50 lb/MWh reduction attributable to PC would be 10% of the states total reduction obligation.

20

can contribute significantly to state compliance obligations with section 111(d) final goals and should be considered a valuable tool in each states compliance toolbox.

Surplus GHG reductions from PC projects are surplus emissions reductions under section 111(d) of the CAA. These emission reductions are not mandated by, or credited in, any other CAA program and are, therefore, entirely additional in the context of CAA compliance. EPA should treat PC project-derived GHG reductions in the same manner that EPA proposes to treat GHG reductions created by utility-scale RE generation. As with PC projects, many RE projects were built prior to EPAs proposed CPP was made public, and many more will be built and installed going forward. Multiple market factors will influence the timing, size and location of both additional RE and PC projects. All installed RE and PC projects, once operational, will contribute to rigorously verified GHG reductions in the need for fossil powered electricity generation. There is no basis for EPA to treat RE- and PC- related GHG emission reductions differently.

21

Enforceability GHG reductions from PC projects support an enforceable state compliance plan. The contractually guaranteed energy savings provided by the ESCO, and the applicable M&V which occurs to ensure the performance of that guarantee, supports EPA requirements for enforceability. Examples of PC projects being included in enforceable SIPs are included in this paper and are described in detail in Appendix H. For further explanation of how PC projects can fit into an enforceable state 111(d) plan, see Section 4 of this paper. Corrective Measures Since ESCOs guarantee that improvements performed through PCs will generate sufficient energy savings to pay for the project over the term of the contract, PC projects contain inherent corrective measures that can ensure 111(d) compliance. The contract requires the ESCO to annually validate all savings through strict M&V protocols and, in the event of a shortfall, the ESCO will perform corrective measures at the project level to deliver the guaranteed energy savings, which make PC projects robust and reliable compliance mechanisms designed to deliver long-term energy savings and emission reductions.

C. Additional Benefits of Performance Contracting in 111(d) Programs General Improving energy efficiency through PC is one of the most beneficial and costeffective ways to address the challenges of high energy prices, energy security and independence, air pollution, and global climate change. Examples of additional benefits include substantial reductions in GHG emissions from fossil fuel use at facilities at no cost to ratepayers, avoiding taxes required to modernize public facilities, avoiding or deferring costly transmission and distribution upgrades, avoiding the electricity losses associated with transmission and distribution, comfort, health, productivity, energy security, limiting water use associated with electricity generation (and vice versa), lowering baseload and peak demand, and reducing the need for additional generation and transmission assets.

22

SIP Credit Given for PC-Driven Emission Reductions PC projects have been included in some EPA-approved SIPs. As noted in an NREL report regarding a PC project in Shreveport, LA27 (See Appendix H), A high level of project certainty and permanence is required for SIP planning purposes. In the Shreveport project, there is a high level of certainty that permanent emissions benefits will result from this project due to the longevity and nature of the Performance Contract between [the ESCO] and the City of Shreveport. The 20-year Performance Contract provides details of the expense, duration, and magnitude of the lighting system upgrades, mechanical system upgrades, control system upgrades, water conservation upgrades, and other miscellaneous upgrades, and guarantees the energy performance of the overall system. Third-party delivered EE projects produce significant non-GHG air quality benefits by reducing the level of needed electric generation and, therefore, the associated emission of criteria pollutants. EPA has identified EE as an eligible tool to be used in SIPs to comply with National Ambient Air Quality Standards (NAAQS). As NAAQS are tightened in future years, and more areas are placed in nonattainment, the co-benefit of reducing criteria pollutants via PC will be highly valued. For example, the Delaware Department of Correction engaged in a $39 million ESPC project that guaranteed more than $80 million in energy savings. In addition to saving nearly 21 million pounds of carbon dioxide emissions in the first year, the project also had first year emissions savings of 20,400 pounds of sulfur dioxide and 21,200 pounds of nitrogen oxides (See Appendix C). Whether projects are pursued for cost savings, GHG reductions, or energy savings, the benefits of reducing criteria pollutants are always present. The following excerpts from EPAs Roadmap for Incorporating Energy Efficiency/Renewable Energy Policies and Programs into State and Tribal Implementation Plans demonstrate how well emissions reductions from PC projects align with EPAs requirements for including EE into SIPs. (See Appendix H for a case study on a PC project that was incorporated in a state SIP).

27 Comparison of Methods for Estimating the NOx Emission Impacts of Energy Efficiency and Renewable Energy Projects: Shreveport, Louisiana Case Study, National Renewable Energy Laboratory, Technical Report, NREL/TP-710-37721 Revised July 2005.

23

Table 2 Excerpts from: EPAs Roadmap for Incorporating Energy Efficiency/Renewable Energy

Policies and Programs into State and Tribal Implementation Plans28 Table 2A: Baseline Emission Projection Pathway: Qualifying Criteria

EPA ROADMAP ADVANTAGES FOR PC UNDER 111(d)

State, Tribal and local agencies can include a specific EE/RE policy in the future SIP/TIP attainment year baseline if:

If a state adopts a plan (policy) to implement PC across a defined building fleet (e.g. all public buildings in the state)

It has already been adopted by a governing body in a jurisdiction, AND

The effects of the policy have not already been accounted for in the SIP/TIP (no double-counting)

Policy test will be met, AND Double counting is addressed by:

o 111(d) discount for EE in electricity importing states

o Reduce PC project contribution by appropriate amount for EE savings funded by other state programs (e.g. state- and utility-run EE program) or RECs generated under state RPS

Table 2B: Baseline Emission Projection Pathway Checklist

EPA ROADMAP ADVANTAGES FOR PC UNDER 111(d)

Identify and describe EE/RE programs and policies to include in the baseline emissions projection

State could submit its total (baseline) electricity consumption for target facilities e.g. all public/taxpayer-funded buildings

Ensure EE/RE programs and policies will be in place for the duration of the planning period

All states have PC authority A state Executive Order could mandate audit

& retrofit action for appropriate period

Perform an analysis of the energy impacts expected from the policies and programs

Baseline electricity savings estimates could be prepared using either standard formulas or ESCO audits

Ensure EE/RE emissions reductions in the baseline emission projections are not accounted for as part of another pathway to avoid double counting

Double counting is addressed by: 111(d) discount for EE in electricity importing

states Reduce PC project contribution by appropriate

amount for EE savings funded by other state programs (e.g. state- and utility-run EE program) or RECs generated under state RPS

28 Roadmap for Incorporating Energy Efficiency/Renewable Energy Policies and Programs into State and Tribal Implementation Plans available at http://www.epa.gov/airquality/eere/manual.html.

24

Table 2C: Control Strategy Pathway Qualifying Criteria

CRITERIA EPA ROADMAP ADVANTAGES FOR PC UNDER 111(d)

Perm

anent

Evidence that regulation or legislation is mandated throughout attainment planning period

Most states already have authorizing statutes, and an Executive Order can establish an PC program (similar to federal program) for the duration of the planning period

Enforceable

EPA has ability to enforce EE/RE policies and programs brought into SIPs as control strategies

Federal enforceability is key for expanded SIP credit

Emission reductions from some PC projects have been included in SIPs and meet the necessary enforceability requirements for SIPs

GHG reductions from PC projects can provide states with enforceable compliance measures. Legally binding contracts to deliver EE are the basis of PC projects. EGUs and states can secure access to/use of GHG reductions from PC projects by:

Direct contracts with PC project participants Purchase and use of tradable emission credits

generated by PC projects (as RECs from PC projects are currently used)

State and local governments can also (as many do) require publically-owned or taxpayer-funded buildings to undergo deep energy retrofits.

Quantifiable

Use a reliable and replicable emissions quantification approach that illustrates which EGUs will reduce emissions based on EE/RE policies and programs

Use of internationally recognized and accredited M&V protocols are applied through well-established methods (e.g. IPMVP) on each PC project

Surplus

(Double C

ounting)

Document no double counting of emissions reductions

Demonstrate emissions reductions are not used for other CAA requirements (e.g. under a cap and trade program)

Double counting is addressed under 111(d) by: 1. 111(d) discount for EE in electricity importing

states 2. Reducing PC project contribution by

appropriate amount for EE savings funded by other state programs (e.g. state- and utility-run EE program) or RECs generated under state RPS

Electricity reductions (and related CO2) are only counted under 111(d)

Predictability

The GHG reductions delivered by PC projects are dependably predictable. Before a PC is agreed to and signed, the EE reductions that the project will deliver are defined, and so, the GHG benefits of the project can be precisely calculated well in advance of when they will occur. The operating parameters and useful life of the measures to be used in a PC project are clearly defined in the Investment Grade Audit (IGA) used as the binding, legal basis for the performance guarantee. The information in the IGA can be used to project GHG reductions for the life of the contract, and beyond assuming appropriate

25

operation and maintenance of the equipment. Equipment performance is validated by the rigorous, on-site M&V performed after construction of the project. Importantly, the project performance guaranteed by contract is known before the construction period, which can be as much as two years prior to completion of the project. Additionally, the GHG benefits of the project can be accurately projected forward for a decade or more into the future.

Job Creation In 2013, the LBNL estimated that ESCO industry revenues were $6.4 billion, 29 which is directly and indirectly responsible for a large number of jobs, particularly in states that incentivize EE projects. If state plans credit and incentivize EE measures, they will spur enormous amounts of cost-effective emission reductions while also generating approximately 95 jobs for every $10 million in ESPC project investment. According to Federal Performance Contracting Coalition (FPCC), a typical $10 million ESPC project supports 20 jobs for the ESCO, 40 jobs for associated subcontracted installation work, and 35 jobs associated with the equipment purchased (See Figure 9). Extrapolating these job figures across the 2013 market suggests that there are approximately 60,800 jobs across the country supported by PC-delivered EE projects. LBNL projects that the industry will grow to between $10.6 and $15.3 billion by 2020,30 which would increase the potential job impact to a range of approximately 100,000 and 145,000 jobs.

29 Stuart, et al., p.15. 30 Ibid.

26

Much of the criticism against pursuing GHG reductions from the power sector through the 111(d) rule will focus on the economic harm caused by increased costs borne by electric utilities and ultimately consumers. The impressive employment profile associated with PC investments along with EE and RE deployment help mitigate the costs of compliance with section 111(d). Onsite Fossil Fuel and Water Savings While 111(d) values the GHG reductions associated with avoided electricity consumption, many PC projects include other environmental benefits, such as on-site fossil fuel savings and reduction in water consumption. By increasing the market signal for electricity avoidance, states will gain the environmental (including carbon dioxide) benefits of non-electricity savings for no additional cost. PC projects often reduce the consumption of water significantly below the consumption levels existing before the conservation measures are installed. This results in quantifiable, environmentally- and economically-valuable reductions in water consumption. Since the movement of water is highly energy intensive, the water savings enabled by PC projects create additional, ancillary GHG reductions by avoiding the energy consumption that would otherwise be needed to transport that water. Performance Contracting Increases States 111(d) Compliance Flexibility PC is a potentially powerful tool that states can use to achieve compliance with their section 111(d) interim and final goals. Since EPA used utility EE programs (and not PC projects) as the basis for establishing the BSER, any GHG reductions achieved through PC should provide states with another strong compliance option that reduces the pressure to meet the standard using the same combination of building blocks in which EPA set the standard. For instance, a state that includes EE savings generated through PC in its state plan, in addition to EE savings generated through ratepayer programs, may create the flexibility to require less than six percent heat rate improvements at coal plants. This will prove valuable in states that have economic or political challenges associated with coal-fired generation, or in states with limited potential for further reductions due to early action. States should view PC as purchasable compliance with the 111(d) goals (See Appendix J). States or EGUs can secure access to or use of the GHG emissions reductions delivered by a PC project through binding contracts with parties participating in the PC project. Greater amounts of PC included in a state plan leads directly to more flexibility in that state to utilize the other

27

building blocks in the most sensible manner. In addition, PC can serve as an easily implementable EE mechanism in states that do not yet have robust ratepayer-based EE programs. PC projects are a shovel-ready resource for states that do not have the type of utility EE programs required to meet the BSER target of 1.5% annual incremental savings. The ESCO industry provides an established infrastructure that is already generating EE savings in every state and can gear up immediately, without any ratepayer investment, to meet CPP needs. During the last three years, the ESCO industry has doubled the production of EE from federal projects in response to President Obamas Performance Contracting Challenge. This accomplishment can be duplicated in any state that is similarly motivated. In fact, this infrastructure can easily be tapped by utility programs that need to deliver low-cost EE savings expeditiously under the section 111(d) rule. The example in Table 3 illustrates how PC projects could enable states to require less than a 6% heat rate improvement at coal-fired power plants, which was identified under building block one as BSER by EPA. Under the BSER scenario, in 2029, Alabama would achieve EE savings equal to 9.48% of avoided generation, which exclude the EE savings generated by PC projects. Assuming Alabama deployed all other building blocks exactly in line with BSER goal setting, the state compliance rate would be 1,059 which is equal to the final goal. If Alabama preferred to require a 3% heat rate improvement at coal-fired power plants instead of a 6% heat rate improvement, and all other levels were in line with BSER, Alabamas compliance rate in 2030 would be 1,079, which is 20 lbs/MWh over the final goal. However, factoring in the low-case scenario for PC projects would bring the state rate down to 1,056, which is 3 lbs/MWh under the final goal. Achieving the high-case scenario for PC projects would bring the state rate down to 1,039, which is 20 lbs/MWh under the final goal. Therefore, aggressively pursuing PC projects would create the necessary compliance flexibility with the final goals that would allow a state to, for example, require less heat rate improvements or fuel switching at affected EGUs. Please see Appendix A for more discussion and more examples related to this point.

28

Table 3: Illustrative Example of PC Contribution to 111(d) Compliance Flexibility Factors:CoalHeatRateImprovement:3%6%NGCCUtilizationRate(Redispatch):70%

Renewables(%of2029BSERassumption):100%EEPrograms(%of2029BSERassumption):100%State

RE EEPrograms

WithoutPC

LowcasePC HighcasePC

2029ExistingandIncrementalREfromBSER

(MW